Indeterminacy in Corporate Law: A Theoretical and Comparative Analysis

Article excerpt

Delaware corporate law is the de facto national law for publicly traded corporations. But whereas its importance is beyond dispute, its efficiency is not. In particular, prominent voices in the literature assert that regulatory competition between states has made Delaware law excessively vague and indeterminate.

However, little evidence has been offered to either support or refute the alleged impact of regulatory competition on legal determinacy. To an extent, this is unsurprising. To show that regulatory competition makes--or does not make--corporate law less determinate, one has to demonstrate how corporate law would look in the absence of regulatory competition--hardly an easy task.

To overcome this problem of evaluation and shed some empirical light on the matter, I use a comparative perspective and contrast Delaware law with the corporate law systems of two other major Western jurisdictions: Germany and the United Kingdom. Due to the peculiar characteristics of Europe's nascent market for corporate charters, regulatory competition cannot be blamed for any indeterminacy that may plague U.K. or German corporate law. However, as I show, both legal systems rely at least as strongly on indeterminate standards as Delaware does. The most obvious explanation for this finding is that regulatory competition may not have the deleterious impact on legal determinacy that its critics allege.

I. INTRODUCTION

II. POTENTIAL REASONS FOR EXCESSIVE INDETERMINACY

    A. Cementing Market Power

    B. Price Discrimination

    C. Warding off Federalization
III. VERIFYING THE INDETERMINACY CLAIM

    A. The Efficiency of Individual Norms

    B. The Law of Other States as a Benchmark

       1. Overall Levels of Determinacy

       2. Specific Provisions

    C. Federal Law as a Benchmark

IV.FOREIGN LAW AS A BENCHMARK

    A. The Absence of Regulatory Competition

    B. The Irrelevance of Regulatory Competition

       1. Cementing Market Power

       2. Price Discrimination

       3. Warding off Federalization

V. FIDUCIARY DUTIES OF DIRECTORS

A. Liability for Bad Business Judgments
B.
       1. Delaware

       2. United Kingdom

       3. Germany

    B. Manifestly Unreasonable Decisions

       1. Delaware

       2. United Kingdom

       3. Germany

    C. Self-Dealing by Corporate Directors

       1. Delaware

       2. United Kingdom

       3. Germany

    D. Managerial Compensation

       1. Delaware

       2. United Kingdom

       3. Germany

    E. Corporate Opportunities

       1. Delaware

       2. United Kingdom

       3. Germany

    F. Hostile Takeovers

       1. Delaware

       2. United Kingdom

       3. Germany

    G. Derivative Suits

       1. Delaware

       2. United Kingdom

       3. Germany

    H. Summary

VI. IMPLICATIONS FOR THE ROLE OF REGULATORY COMPETITION

    A. Selection Bias

    B. Unobserved Factors

VII. IMPLICATIONS FOR THE CONVERGENCE DEBATE

VIII. CONCLUSION

I. INTRODUCTION

Delaware completely dominates the law governing public corporations: It is home to more than half of all existing public corporations (1) and almost ninety percent of corporations that have gone public in recent years. (2) However, the efficiency of Delaware law is often questioned. One of the most central criticisms today concerns the issue of legal certainty: Prominent voices in the literature argue that regulatory competition has made Delaware law inefficiently indeterminate. (3)

This charge builds on Kaplow's classic distinction between rules and standards: Rules are norms whose content is determined ex ante. By contrast, standards are norms whose content is determined ex post by the courts. (4) Thus, when Delaware law is accused of being excessively "indeterminate" or "vague," it is criticized for using too many standards and too few rules. Accordingly, this Article uses these expressions interchangeably. (5)

In its most elegant form, the claim that regulatory competition has made Delaware excessively indeterminate has two components. …